FORMATION OF A COMPANY 163

PART-II

Corporate Organisation,
Finance and Trade

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164 BUSINESS STUDIES

CHAPTER 7

FORMATION OF A COMPANY

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

• specify the important stages in the formation of a company;

• describe the steps involved in each stage of company formation;

• specify the documents to be submitted to the registrar of

companies; and

• state the need of certificate of incorporation and certificate to

commence business.

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FORMATION OF A COMPANY 165

Avtar, a brilliant automobile engineer, has recently developed a new carburettor

in his factory which he is running as a sole proprietor. The new carburettor can
cut down petrol consumption of a car engine by 40 percent. He is now thinking
of producing it on a large scale for which he requires a large amount of money.
He is to evaluate different forms of organisations for doing the business of
manufacturing and marketing his carburettor. He decides against converting
his sole proprietorship to partnership as the requirement of funds for the project
is large and the product being new, there is a lot of risk involved. He is advised
to form a company. He wants to know about the formalities required for the
formation of a company.

7.1 INTRODUCTION formalities and procedures. To fully

Modern day business requires large
amount of money. Also, due to
increasing competition and fast
changing technological environment,
the element of risk is increasing. As a
result, the company form of
organisation is being preferred by more
and more business firms, particularly
for setting up medium and large sized
organisations.
The steps which are required from
the time a business idea originates to
the time, a company is legally ready to
commence business are referred to as
stages in the formation of a company.
Those who are taking these steps and
the associated risks are promoting a
company and are called its promoters.
The present chapter describes in
some details the stages in the formation
of a company and also the steps
required to be taken in each stage so
that a fair idea about these aspects can
be made.
7.2 FORMATION OF A COMPANY
Formation of a company is a complex
activity involving completion of legal
understand the process one can divide
the formalities into three distinct stages,
which are: (i) Promotion; (ii)
Incorporation and (iii) Subscription of
capital.
It may, however, be noted that these
stages are appropriate from the point
of view of formation of any kind of
company. Private company as against
the public limited company is prohibited
to raise funds from public, it does not
need to issue a prospectus and complete
the formality of minimum subscription.
In the next section, we shall discuss
the stages in the formation of a
company in detail.
7.2.1 Promotion of a Company
Promotion is the first stage in the
formation of a company. It involves
conceiving a business idea and taking
an initiative to form a company so that
practical shape can be given to
exploiting the available business
opportunity. Thus, it begins with
somebody having discovered a potential
business idea. Any person or a group
of persons or even a company may have

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discovered an opportunity. If such a
person or a group of persons or a
company proceeds to form a company,
then, they are said to be the promoters
of the company.
A promoter is said to be the one who
undertakes to form a company with
reference to a given project and to set it
going and who takes the necessary
steps to accomplish that purpose.
Thus, apart from conceiving a business
opportunity the promoters analyse its
prospects and bring together the men,
materials, machinery, managerial
abilities and financial resources and set
the organisation going.
As per section 69, a promoter
means a person
(a) Who has been named as such in a
prospectus or is identified by the
company in the annual return
referred to in section 92; or
(b) Who has control over the affairs of
the company, directly or indirectly
whether as a shareholder, director
or otherwise; or
(c) In accordance with whose advice,
directions or instructions the Board
of Directors of the company is
accustomed to act. However, it is
provided that nothing in this sub-
clause shall apply to a person who
is acting merely in a professional
capacity.
After thoroughly examining the
feasibility of the idea, the promoters
assemble resources, prepare necessary
documents, give a name and perform
various other activities to get a
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company registered and obtain the
necessary certificate enabling the
company to commence business.
Thus, the promoters perform various
functions to bring a company into
existence.
Functions of a Promoter
The important functions of promoters
may be listed as below:
(i) I d e n t i f i c a t i o n o f b u s i n e s s
opportunity: The first and foremost
activity of a promoter is to identify a
business opportunity. The
opportunity may be in respect of
producing a new product or service or
making some product available
through a different channel or any
other opportunity having an
investment potential. Such
opportunity is then analysed to see its
technical and economic feasibility.
(ii) Feasibility studies: It may not be
feasible or profitable to convert all
identified business opportunities into
real projects. The promoters, therefore,
undertake detailed feasibility studies
to investigate all aspects of the business
they intend to start. Depending upon
the nature of the project, the following
feasibility studies may be undertaken,
with the help of the specialists like
engineers, chartered accountants etc.,
to examine whether the perceived
business opportunity can be profitably
exploited.
(a) Technical feasibility: Sometimes
an idea may be good but
technically not possible to execute.
FORMATION OF A COMPANY 167

It may be so because the required that developing townships is very

raw material or technology is not
easily available. For example, in our
earlier story suppose Avtar needs
a particular metal to produce the
carburettor. If that metal is not
produced in the country and
because of poor political relations,
it can not be imported from the
country which produces it, the
project would be technically
unfeasible until arrangements are
made to make the metal available
from alternative sources.
(b) Financial feasibility: Every
business activity requires funds.
The promoters have to estimate the
fund requirements for the identified
business opportunity. If the
required outlay for the project is so
large that it cannot easily be
arranged within the available
means, the project has to be given
up. For example, one may think
lucrative. It may turn out that the
required funds are in several crores
of rupees, which cannot be
arranged by floating a company by
the promoters. The idea may be
abandoned because of the lack of
financial feasibility of the project.
(c) Economic feasibility: Sometimes
it so happens that a project is
technically viable and financially
feasible but the chance of it being
profitable is very little. In such cases
as well, the idea may have to be
abondoned. Promoters usually take
the help of experts to conduct these
studies. It may be noted that these
experts do not become promoters
just because they are assisting the
promoters in these studies.
Only when these investigations
throw up positive results, the
promoters may decide to actually
launch a company.

Name Clause
A name is considered undesirable in the following cases:
(a) If it is identical with or too closely resembles the name of an existing
company
(b) If it is misleading. It is so considered if the name suggests that the company
is in a particular business or it is an association of a particular type when
it is not true
(c) If it is violative of the provisions of ‘The Emblem and Names (Prevention of
Improper Use) Act 1950, as given in the schedule to this Act. This schedule
specifies, inter alia, the name, emblem or official seal of the UNO and its
bodies like WHO, UNESCO etc. Government of India, State Governments,
President of India or Governer of any State, the Indian National Flag. The
Act also prohibits use of any name which may suggest patronage of
Government of India, or any state government or any local authority

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(iii) Name approval: Having decided
incorporate to a company, the
promoters have to select a name for it
and submit, an application to the
registrar of companies of the state in
which the registered office of the
company is to be situated, for its
approval. The proposed name may be
approved if it is not considered
undesirable. It may happen that
another company exists with the same
name or a very similar name or the
preferred name is misleading, say, to
suggest that the company is in a
particular business when it is not true.
In such cases the proposed name is not
accepted but some alternate name may
be approved. Therefore, three names,
in order of their priority are given in the
application to the Registrar of
Companies. (Proforma INC1 is given at
the end of the Book).
(iv) Fixing up Signatories to the
Memorandum of Association:
Promoters have to decide about the
members who will be signing the
Memorandum of Association of the
proposed company. Usually the people
signing memorandum are also the first
Directors of the Company. Their written
consent to act as Directors and to take
up the qualification shares in the
company is necessary.
(v) Appointment of professionals:
Certain professionals such as
mercantile bankers, auditors etc., are
appointed by the promoters to assist
them in the preparation of necessary
documents which are required to be
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with the Registrar of Companies. The
names and addresses of shareholders
and the number of shares allotted to
each is submitted to the Registrar in a
statement called return of allotment.
(vi) P r e p a r a t i o n o f n e c e s s a r y
documents: The promoter takes up
steps to prepare certain legal
documents, which have to be
submitted under the law, to the
Registrar of the Companies for getting
the company registered. These
documents are Memorandum of
Association, Articles of Association and
Consent of Directors.
Documents Required to be
Submitted
A. Memorandum of Association:
Memorandum of Association is the
most important document as it
defines the objectives of the
company. No company can legally
undertake activities that are not
contained in its Memorandum of
Association. As per section 2(56)
of The Companies Act, 2013
“memorandum” means the
memorandum of association of a
company as originally framed or as
altered from time to time in
pursuance of any previous
company law or of this Act. The
Memorandum of Association
contains different clauses, which are
given as follows:
(i) The name clause: This clause
contains the name of the company with
FORMATION OF A COMPANY 169

which the company will be known, clause of the memorandum. It

which has already been approved by
the Registrar of Companies.
(ii) Registered office clause: This
clause contains the name of the state,
in which the registered office of the
company is proposed to be situated.
The exact address of the registered
office is not required at this stage but
the same must be notified to the
Registrar within thirty days of the
incorporation of the company.
(iii ) O b j e c t s c l a u s e : T h i s i s
probably the most important
defines the purpose for which the
company is formed. A company is
not legally entitled to undertake an
activity, which is beyond the objects
stated in this clause. The main
objects for which the company is
formed are listed in this sub-
clause. It must be observed that an
act which is either essential or
incidental for the attainment of the
main objects of the company is
deemed to be valid, although it may
not have been stated explicitly.

Respective forms for Memorandum of Association

1. Table A MOA of a company limited by shares

2. Table B MOA of a company limited by guarantee and not having
share capital
3. Table C MOA of a company limited by guarantee and not having
share capital
4. Table D MOA of an unlimited company and not having share capital
5. Table E MOA of an unlimited company and having share capital
Respective forms for Articles of a Company
6. Table F AOA of a company limited by shares
7. Table G AOA of a company limited by guarantee and having share
capital
8. Table H AOA of a company limited by guarantee and not having
share capital
9. Table I AOA of an unlimited company and having share capital
10. Table J AOA of an unlimited company and not having share capital

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(iv) Liability clause: This clause
limits the liability of the members to the
amount unpaid on the shares owned
by them.
For example, if a shareholder has
purchased 1000 shares of `10 each
and has already paid ` 6 per share, his/
her liability is limited to ` 4 per share.
Thus, even in the worst case,
he/she may be called upon to pay
` 4, 000 only.
(v) Capital clause: This clause
specifies the maximum capital which
the company will be authorised to raise
through the issue of shares. The
authorised share capital of the
proposed company along with its
division into the number of shares
having a fixed face value is specified in
this clause. For example, the
authorised share capital of the
company may be ` 25 lakhs with
divided into 2.5 lakh shares of ` 10
each. The said company cannot issue
share capital in excess of the amount
mentioned in this clause.
The signatories to the
Memorandum of Association state their
intention to be associated with the
company and give their undertaking to
subscribe to the shares mentioned
against their names. The memorandum
of a company shall be in respective
forms specified in Tables A, B, C, D and
E in Schedule I as may be applicable
to such company.
The Memorandum of Association
must be signed by at least seven
persons in case of a public company
and by two persons in case of a private
company.
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A copy of a Memorandum of
Association is given at the end of the
chapter.
B. Articles of Association: Articles of
Association are the rules regarding
internal management of a company.
These rules are subsidiary to the
Memorandum of Association and
hence, should not contradict or
exceed anything stated in the
Memorandum of Association.
According to section 2(5) of The
Companies Act, 2013, ‘articles’
means the article of association of a
company as originally framed or as
altered from time to time or applied
in pursuance of any previous
company law or of this Act. The
articles of a company shall be in
respective forms as specified in Table
F, G, H, I and J in schedule I as may
be applicable to such company.
However, the companies are free to
make their own articles of association
which may be contrary to the clauses
of Table F,G,H,I,J and in that case
articles of association as adopted by
the company shall apply.
C. Consent of Proposed Directors:
Apart from the Memorandum and
Articles of Association, a written
consent of each person named as a
director is required confirming that
they agree to act in that capacity and
undertake to buy and pay for
qualification shares, as mentioned in
the Articles of Association.
D. Agreement: The agreement, if any,
which the company proposes to
enter with any individual for
appointment as its Managing
FORMATION OF A COMPANY 171

Qualification Shares
To ensure that the directors have some stake in the proposed company, the
Articles usually have a provision requiring them to buy a certain number of
shares. They have to pay for these shares before the company obtains Certificate
of Commencement of Business. These are called Qualification Shares.

The Articles generally contains the following matters:

1. Exclusion wholly or in part of Table F.
2. Adoption of preliminary contracts.
3. Number and value of shares.
4. Issue of preference shares.
5. Allotment of shares.
6. Calls on shares.
7. Lien on shares.
8. Transfer and transmission of shares.
9. Nomination.
10. Forfeiture of shares.
11. Alteration of capital.
12. Buy back.
13. Share certificates.
14. Dematerialization.
15. Conversion of shares into stock. Incorporation of Companies and Matters
Incidental Thereto
16. Voting rights and proxies.
17. Meetings and rules regarding committees.
18. Directors, their appointment and delegations of powers.
19. Nominee directors.
20. Issue of Debentures and stocks.
21. Audit committee.
22. Managing director, Whole-time director, Manager, Secretary.
23. Additional directors.
24. Seal.
25. Remuneration of directors.
26. General meetings.
27. Directors meetings.
28. Borrowing powers.
29. Dividends and reserves.
30. Accounts and audit.
31. Winding up.
32. Indemnity.
33. Capitalisation of reserves.

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Director or a whole time Director or
Manager is another document
which is required to be submitted
to the Registrar for getting the
company registered under the Act.
E. Statutory Declaration: A the company.
declaration stating that all the legal
requirements pertaining to
registration have been complied
with is to be submitted to the
Registrar with the above mentioned
documents for getting the company
registered under the law. This
statement can be signed by an
advocate or by a Chartered
Accountant or a Cost Accountant
or a Company Secretary in practice
who is engaged in the formation of
a company and by a person named
in the articles as a director or
manager or secretary of the
company.
F. Receipt of Payment of fee: Along
with the above-mentioned
documents, necessary fees has to be
paid for the registration of the
company. The amount of such fees
shall depend on the authorised
share capital of the company.
Position of Promoters
Promoters undertake various activities
to get a company registered and get it
to the position of commencement of
business. But they are neither the
agents nor the trustees of the company.
They can’t be the agents as the
company is yet to be incorporated.
Therefore, they are personally liable for
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all the contracts which are entered by
them, for the company before its
incorporation, in case the same are not
ratified by the company later on. Also
promoters are not the trustees of
Promoters of a company enjoy a
fiduciary position with the company,
which they must not misuse. They
can make a profit only if it is disclosed
but must not make any secret profits.
In the event of a non-disclosure, the
company can rescind the contract
and recover the purchase price paid
to the promoters. It can also claim
damages for the loss suffered due to
the non-disclosure of material
information.
Promoters are not legally entitled
to claim the expenses incurred in the
promotion of the company. However,
the company may choose to
reimburse them for the pre-
incorporation expenses. The company
may also remunerate the promoters
for their efforts by paying a lump sum
amount or a commission on the
purchase price of property purchased
through them or on the shares sold.
The company may also allot them
shares or debentures or give them an
option to purchase the securities at a
future date.
7.2.2 Incorporation
After completing the aforesaid
formalities, promoters make an
application for the incorporation of
the company. The application is to be
FORMATION OF A COMPANY 173

filed with the Registrar of Companies 3. Written consent of the proposed

of the state within which they plan to
establish the registered office of the
company. The application for
registration must be accompanied
with certain documents about which
we have already discussed in the
previous sections. These may be
briefly mentioned again:
1. The Memorandum of Association
duly stamped, signed and
witnessed. In case of a public
company, at least seven members
must sign it. For a private
company however the signatures
of two members are sufficient.
The signatories must also give
information about their address,
occupation and the number of
shares subscribed by them.
2. The Articles of Association duly
stamped and witnessed as in case
of the Memorandum. However, as
stated earlier, a public company
may adopt Table A, which is a
model set of Articles, given in the
Companies Act. In that case a
statement in lieu of the prospectus
is submitted, instead of Articles
of Association.
directors to act as directors and
an undertaking to purchase
qualification shares.
4. The agreement, if any, with the
proposed Managing Director,
Manager or whole-time director.
5. A copy of the Registrar’s letter
approving the name of the
company.
6. A statutory declaration affirming
that all legal requirements for
registration have been complied
with. This must be duly signed.
7. A notice about the exact address
of the registered office may also
be submitted along with these
documents. However, if the same
is not submitted at the time of
incorporation, it can be
submitted within 30 days of the
receipt of the certificate of
incorporation.
8. Documentary evidence of payment
of registration fees.
The Registrar upon submission of
the application along with the required
documents has to be satisfied that the
documents are in order and that all the

Preliminary Contracts
During the promotion of the company, promoters enter into certain contracts
with third parties on behalf of the company. These are called preliminary
contracts or pre-incorporation contracts. These are not legally binding on
the company. A company after coming into existence may, if it so chooses,
decide to enter into fresh contracts with the same terms and conditions to
honour the contracts made by the promoters. Note that it cannot ratify a
preliminary contract. A company thus cannot be forced to honour a preliminary
contract. Promoters, however, remain personally liable to third parties for
these contracts.

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statutory requirements regarding the a company. Imagine, what would

registration have been complied with.
However, it is not his duty to carry out
a thorough investigation about the
authenticity of the facts mentioned in
the documents.
When the Registrar is satisfied,
about the completion of formalities
for registration, a Certificate of
Incorporation is issued to the company,
which signify the birth of the company.
The certificate of incorporation may
therefore be called the birth certificate
of the company.
With effect from November 1, 2000,
the Registrar of Companies allots a
CIN (Corporate Identity Number) to
the Company.
Effect of the Certificate of
Incorporation
A company is legally born on the date
printed on the Certificate of
Incorporation. It becomes a legal entity
with perpetual succession on such
date. It becomes entitled to enter into
valid contracts. The Certificate of
Incorporation is a conclusive evidence
of the regularity of the incorporation of
happen to an unsuspecting party with
which the company enters into a
contract, if it is later found that the
incorporation of the company was
improper and hence invalid. Therefore,
the legal situation is that once a
Certificate of Incorporation has been
issued, the company has become a
legal business entity irrespective of any
flaw in its registration. The Certificate
of Incorporation is thus conclusive
evidence of the legal existence of the
company. Some interesting examples
showing the impact of the
conclusiveness of the Certificate of
Incorporation are as under:
(a) Documents for registration were
filed on 6th January. Certificate of
Incorporation was issued on 8th
January. But the date mentioned
on the Certificate was 6th January.
It was decided that the company
was in existence and the contracts
signed on 6th January were
considered valid.
(b) A person forged the signatures
of others on the Memorandum.
The Incorporation was still
considered valid.

Director Identification Number (DIN)

Every Individual intending to be appointed as director of a company shall make
an application for allotment of Director Identification Number (DIN) to the Central
Government in prescribed form along with fees.
The Central Government shall allot a Director Identification Number to an
application within one month from the receipt of the application.
No individual, who has already been allotted a Director Identification Number,
shall apply for, obtain or possess another Director Identification Number

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Thus, whatever be the deficiency in
the formalities, the Certificate of
Incorporation once issued, is a
conclusive evidence of the existence of
the company. Even when a company
gets registered with illegal objects, the
birth of the company cannot be
questioned. The only remedy available
is to wind it up. Because the Certificate
of Incorporation is so crucial, the
Registrar has to go very carefully before
issuing it.
On the issue of Certificate of
Incorporation, a private company can
immediately commence its business. It
can raise necessary funds from
friends, relatives or through private
arrangement and proceed to start
business.
7.2.3 Capital Subscription
A public company can raise the
required funds from the public by
means of issue of securities (shares and
debentures etc.). For doing the same,
it has to issue a prospectus which is
an invitation to the public to subscribe
to the capital of the company and
undergo various other formalities. The
following steps are required for raising
funds from the public:
(i) SEBI Approval: SEBI (Securities
and Exchange Board of India) which is
the regulatory authority in our country
has issued guidelines for the disclosure
of information and investor protection.
A public company inviting funds from
the general public must make adequate
disclosure of all relevant information
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and must not conceal any material
information from the potential
investors. This is necessary for
protecting the interest of the investors.
Prior approval from SEBI is, therefore,
required before going ahead with
raising funds from public.
(ii) Filing of Prospectus: A copy of
the prospectus or statement in lieu of
prospectus is filed with the Registrar
of Companies. A prospectus is ‘any
document described or issued as a
prospectus including any notice,
circular, advertisement or other
document inviting deposits from the
public or inviting offers from the
public for the subscription or
purchase of any securities of, a body
corporate’. In other words, it is an
invitation to the public to apply for
securities (shares, debentures etc.) of
the company or to make deposits in
the company. Investors make up
their minds about investment in a
company primarily on the basis of the
information contained in this
document. Therefore, there must not
be a mis-statement in the prospectus
and all material significant
information must be fully disclosed.
(iii) A p p o i n t m e n t o f B a n k e r s ,
Brokers, Underwriters: Raising funds
from the public is a stupendous task.
The application money is to be received
by the bankers of the company. The
brokers try to sell the shares
by distributing the forms and
encouraging the public to apply for the
shares. If the company is not
176 BUSINESS STUDIES

Difference between Memorandum of Association and Articles of Association

Basis of Memorandum of
Difference Association
Objectives Memorandum of Association
defines the objects for which
the company is formed.
Position This is the main document
of the company and is
subordinate to the
Companies Act.
Relationship Memorandum of Association
defines the relationship of
the company with outsiders.
Validity Acts beyond the
Memorandum of Association
are invalid and cannot be
ratified even by a unanimous
vote of the members.
Necessity Every company has to file a
Memorandum of Association.
Articles of
Association
Articles of Association are
rules of internal
management of the
company. They indicate
how the objectives of the
company are to be
achieved.
This is a subsidiary
document and is
subordinate to both the
Memorandum of
Association and the
Companies Act.
Articles define the
relationship of the
members and the
company.
Acts which are beyond
Articles can be ratified by
the members, provided
they do not violate the
Memorandum.
It is not compulsory for a
public ltd. company to file
Articles of Association. It
may adopt Table F of The
Companies Act, 2013

reasonably assured of a good public the issue. Appointment of underwriters

response to the issue, it may appoint
underwriters to the issue. Underwriters
undertake to buy the shares if these
are not subscribed by the public. They
receive a commission for underwriting
is not necessary.
(iv) Minimum Subscription: In
order to prevent companies from
commencing business with inadequate
resources, it has been provided that the

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company must receive applications for
a certain minimum number of shares
before going ahead with the allotment
of shares. According to the Companies
Act, this is called the ‘minimum
subscription’. As per the SEBI
Guidelines the limit of minimum
subscription is 90 per cent of the size
of the issue. Thus, if applications
received for the shares are for an
amount less than 90 per cent of the
issue size, the allotment cannot be
made and the application money
received must be returned to the
applicants.
(v) Application to Stock Exchange:
An application is made to at least one
stock exchange for permission to deal
in its shares or debentures. If such
permission is not granted before the
expiry of ten weeks from the date of
closure of subscription list, the
allotment shall become void and all
money received from the applicants
will have to be returned to them within
eight days.
(vi) Allotment of Shares: Till the time
shares are alloted, application money
received shoud remain in a seperate
bank account and must not be used
by the company. In case the number of
shares allotted is less than the number
applied for, or where no shares are
allotted to the applicant, the excess
application money, if any, is to be
returned to applicants or adjusted
towards allotment money due from
them. Allotment letters are issued to the
successful allottees. ‘Return of
allotment’, signed by a director or
secretary is filed with the Registrar of
Companies within 30 days of allotment.
A public company may not invite
public to subscribe to its securities
(shares, debentures etc.). Instead, it
can raise the funds through friends,
relatives or some private
arrangements as done by a private
company. In such cases, there is no
need to issue a prospectus. A
‘Statement in Lieu of Prospectus’ is
filed with the Registrar at least three
days before making the allotment.

One Person Company

With the implementation of The Companies Act, 2013, a single person could
constitute a company, under the One Person Company (OPC) concept.
The introduction of OPC in the legal system is a move that would encourage
corporatisation of micro businesses and entrepreneurship.
In India, in the year 2005, the JJ Irani Expert Committee recommended the
formation of OPC. It had suggested that such an entity may be provided with a

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simpler legal regime through exemptions so that the small entrepreneur is not
compelled to devote considerable time, energy and resources on complex legal
compliance.
One Person Company is a company with only one person as a member. That one
person will be the shareholder of the company. It avails all the benefits of a
private limited company such as separate legal entity, protecting personal assets
from business liability and perpetual succession.
Characteristics
(1) Only a natural person who is an Indian citizen and resident in India-
(a) Shall be eligible to incorporate a One Person Company;
(b) Shall be a nominee for the sole member of a One Person Company.
Explanation – For the purposes of this rule, the term “resident in India”
means a person who has stayed in India for a period of not less than one
hundred and eighty two days during the immediately preceding one
calendar year.
(2) No person shall be eligible to incorporate more than a One Person Company
or become nominee in more than one such company.
(3) Where a natural person, being member in One Person Company in accordance
with this rule becomes a member in another such Company by virtue of his
being a nominee in that One Person Company, such person shall meet the
eligibility criteria specified in sub rule (2) within a period of one hundred
and eighty days.
(4) No minor shall become member or nominee of the One Person Company or
can hold share with beneficial interest.
(5) Such Company cannot be incorporated or converted into a company under
section 8 of the Act.
(6) Such Company cannot carry out Non-Banking Financial Investment
activities including investment in securities of anybody corporates.
(7) No such company can convert voluntarily into any kind of company unless
two years have expired from the date of incorporation of One Person Company,
except threshold limit (paid up share capital) is increased beyond fifty lakh
rupees or its average annual turnover during the relevant period exceeds
two crore rupees.

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FORMATION OF A COMPANY 179

“SCHEDULE I”
(See sections 4 and 5)
Table A
MEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BY SHARES
1st The name of the company is “.......................................... Limited/Private
Limited”.
2nd The registered office of the company will be situated in the State of ..................
3rd (a) The objects to be pursued by the company on its incorporation are:-

.........................................................................................................................

.........................................................................................................................
(b) Matters which are necessary for furtherance of the objects specified in
clause 3 (a) are:-

.........................................................................................................................

.........................................................................................................................
4th The liability of the member(s) is limited and this liability is limited to the
amount unpaid, if any, on the shares held by them.
5th The share capital of the company is ...................................................................
rupees, divided into ........................ shares of ........................ rupees each.
6th We, the several persons, whose names and addresses are subscribed, are
desirous of beingformed into a company in pursuance of this memorandum
of association, and we respectively agree to take the number of shares in the
capital of the company set against our respective names:-

Names, addresses, No. of shares Signature Signature, names

descriptions and taken by each of subscriber addresses,
occupations of descriptions and
subscribers occupations of
witnesses
A.B. of ................ Merchant ..................... Signed before me:
Signature ...............
C.D. of ................ Merchant ..................... Signed before me:
Signature ...............
E.F. of ................ Merchant ..................... Signed before me:
Signature ...............

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G.H. of ............... Merchant ..................... Signed before me:

Signature ..............
I.J. of ................ Merchant ..................... Signed before me:
Signature ..............
K.L. of ................ Merchant ..................... Signed before me:
Signature ..............
M.N. of ............... Merchant ..................... Signed before me:
Signature ..............
Total shares taken:

7th I, whose name and address is given below, am desirous of forming a

company in pursuance of this memorandum of association and agree to
take all the shares in the capital of the company (Applicable in case of one
person company):-

___________________________________________________________________________________
Names, addresses, Signature of subscribed Signature, name, address,
occupations of description and occupation
Subscribers of witness

___________________________________________________________________________________
8 th Shri/Smt ......................................, son/daughter of ......................................,
resident of .................................................................... aged ...................... years
shall be the nominee in the event of death of the sole member (Applicable in
case of one person company)

Dated ...................................... The day of ......................................

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Key Terms
Promotion Memorandum of Association Articles of Association
Prospectus Incorporation Capital subscription
Commencement of
Business

SUMMARY

There are two stages in the formation of a private company, promotion and
incorporation. A public company has to undergo capital subscription stage
to begin operations.
1. Promotion: It begins with a potential business idea. Certain feasibility
studies e.g., technical, financial and economic, are conducted to
determine whether the idea can be profitably exploited. In case, the
investigations yield favourable results, promoters may decide to form
the company. Persons who conceive the business idea, decide to form a
company, take necessary steps for the same, and assume associated
risks, are called promoters.
Steps in Promotion
i. Approval of company’s name is taken from the Registrar of
Companies
ii. Signatories to the Memorandum of Association are fixed
iii. Certain professionals are appropriated to assist the promoters
iv. Documents necessary for registration are prepared
Necessary Documents
a. Memorandum of Association
b. Articles of Association
c. Consent of proposed directors
d. Agreement, if any, with proposed managing or whole time director
e. Statutory declaration
2. Incorporation: An application is made by promoters to the Registrar of
Companies alongwith necessary documents and registration fee. The
Registrar, after due scrutiny, issues certificate of incorporation. The
certificate of incorporation is a conclusive evidence of the legal existence
of the company.
3. Capital Subscription: A public company raising funds from the public
needs to take following steps for fundraising:

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(i) SEBI approval;

(ii) File a copy of prospectus with the Registrar of Companies;
(iii) Appointment of brokers, bankers and underwriters etc.;
(iv) Ensure that minimum subscription is received;
(v) Application for listing of company’s securities;
(vi) Refund/adjust excess application money received;
(vii) Issue allotment letters to successful applicants; and
(viii) File return of allotment with the Registrar of Companies (ROC).
A public company, raising funds, raising funds from friends/relatives (not
public) has to file a statement in lieu of prospectus with the ROC at least
three days before allotment of shares and returns of allotment after
completing the allotment. As per the SEBI guidelines, minimum subcription
has to be 90% of the shares to be issued to be public.
Preliminary Contracts: Contracts signed by promoters with third parties
before the incorporation of company.
Provisional Contracts: Contracts signed after incorporation but before
commencement of business.

EXERCISES

Multiple Choice Questions

1. Minimum number of members to form a private company is
(a) 2 (b) 3
(c) 5 (d) 7
2. Minimum number of members to form a public company is
(a) 5 (b) 7
(c) 12 (d) 21
3. Application for approval of name of a company is to be made to
(a) SEBI (b) Registrar of Companies
(c) Government of India (d) Government of the State
in which Company is to
be registered

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4. A proposed name of Company is considered undesirable if

(a) It is identical with the name (b) It resembles closely with
of an existing company the name of an existing
company
(c) It is an emblem of Government (d) In case of any of the above
of India, United Nations etc.
5. A prospectus is issued by
(a) A private company (b) A public company seeking
investment from
public
(c) A public enterprise (d) A public company
6. Stages in the formation of a public company are in the following order
(a) Promotion, Commencement (b) Incorporation, Capital
of Business, Capital Subscription, Promotion
Subscription, Incorporation,
(c) Promotion, Incorporation, (d) Capital Subscription,
Capital Subscription, Promotion, Incorporation,
7. Preliminary Contracts are signed
(a) Before the incorporation (b) After incorporation but
before capital subscription
(c) After incorporation but before (d) After commencement of
commencement of business business
8. Preliminary Contracts are
(a) binding on the Company (b) binding on the Company, if
ratified after incorporation
(c) binding on the (d) not binding on the
Company, after incorporation Company

True/False Answer Questions

1. It is necessary to get every company incorporated, whether private or
public.
2. Statement in lieu of prospectus can be filed by a public company going
for a public issue.
3. A company can commence business after incorporation.
4. Experts who help promoters in the promotion of a company are also
called promoters.
5. A company can ratify preliminary contracts after incorporation.

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6. If a company is registered on the basis of fictitious names, its

incorporation is invalid.
7. ‘Articles of Association’ is the main document of a company.
8. Every company must file Articles of Association.
9. If a company suffers heavy issues and its assets are not enough to pay
off its liabilities, the balance can be recovered from the private assets of
its members.

Short Answer Questions

1. Name the stages in the formation of a company.
2. List the documents required for the incorporation of a company.
3. What is a prospectus? Is it necessary for every company to file a
prospectus?
4. Briefly explain the term ‘Return of Allotment’.
5. At which stage in the formation of a company does it interact with SEBI.

Long Answer Questions

1. What is meant by the term ‘Promotion’. Discuss the legal position of
promoters with respect to a company promoted by them.
2. Explain the steps taken by promoters in the promotion of a company.
3. What is a ‘Memorandum of Association’? Briefly explain its clauses.
4. Distinguish between ‘Memorandum of Association’ and ‘Articles of
Association.’
5. What is the meaning of ‘Certificate of Incorporation’?
6. Discuss the stages of formation of a company?

Project/Assignment
Find out from the office of the Registrar of Companies, the actual procedure
for formation of companies. Does it match with what you have studied.
What are the obstacles which companies face in getting themselves
registered.

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